For years we’ve been writing about the “fake data” coming out of China’s economic reports. Somehow we’ve always been skeptical of reports that reveal exactly 7.00% GDP growth for 10 years in a row irrespective of what happens in other global economies.
Therefore, you can imagine our ‘shock’ when China’s “top statistician” confirmed in December 2016, via an article in the “People’s Daily” newspaper, that “some local statistics are falsified, and fraud and deception happen from time to time.”
China’s top statistician has acknowledged the country’s problems with falsification of economic data, pledging severe punishment for perpetrators in a nod to widespread suspicion that official numbers often fail to reflect true economic conditions.
“Currently, some local statistics are falsified, and fraud and deception happen from time to time, in violation of statistics laws and regulations,” Ning Jizhe, director of the National Bureau of Statistics, wrote in a column for Communist party mouthpiece the People’s Daily on Thursday.
Foreign economists and investors have long expressed doubts about China’s economic data. Most prominent are concerns about gross domestic product figures. Compared with other countries. China’s inflation-adjusted GDP growth rates are remarkably stable from quarter to quarter, even as nominal figures show considerable volatility. The NBS has denied charges that it manipulates inflation data to massage headline growth figures.
As the FT notes this morning, the preponderance of ‘fake data’ coming out of various regions has resulted in China’s national statisticians regularly discounting local data to correct for local officials’ habit of inflating figures to look good. Obviously, this “smoothing” masks fluctuations in China’s economic cycles and effectively negates the utility of publishing statistics in the first place.
Of course, the real question today is not whether China’s economic data is fake, but rather by how much it’s been faked. As it turns out, the Financial Times took a shot at calculating that exact value today and the results are somewhat staggering. In fact, in metals and mining dependent local economies like Inner Mongolia, the FT figures that GDP growth figures could have been overstated by up to 30% in 2016.
Inner Mongolia admitted this month that its data for “added value of industrial enterprises of a certain scale” were inflated 40 per cent in 2016. According to the Chinese statistical yearbook, secondary industry comprises 47 per cent of its GDP. Assuming its 2015 figures are accurate, the revised 2016 figures mean the region’s economy shrank 13 per cent. If that sounds implausible, consider the likelihood that 2015 figures were also incorrect.
Like Inner Mongolia, Liaoning also admitted that it faked data for about five years but hasn’t bothered to revise its fabricated historical data.
Meanwhile, Shanxi, China’s most coal-dependent province, has managed to post strong growth figures right through the collapse in global coal markets which resulted bankruptcies of even the largest international coal companies.
While President Xi Jinping has called for “seriously punishing statistical falsification and fraudulent behavior,” others point out that political influence over statistical data is the precisely the problem, not the solution. Of course, with local politicians evaluated on their ability to meet or exceed centrally planned growth targets, it’s no surprise that the “sum of provincial GDP figures” consistently exceeds the national calculations.
In October a powerful Communist party task force led by President Xi Jinping issued policy guidelines calling for “increasing data accuracy” through methods including harsher penalties for falsification. Mr Ning’s article lauds the achievements of his agency in implementing these guidelines.
“Seriously punishing statistical falsification and fraudulent behaviour benefits the rule of law and the upholding the credibility of the party and the government,” Mr Ning wrote.
Critics of Chinese statistics have consistently argued that political interference in statistical compilation is the problem, not the solution. Communist party officials, especially at the local level, are still evaluated largely on their ability to meet or exceed economic growth targets. For many years, the sum of provincial GDP figures has far exceeded the national total. The party has taken tentative steps in recent years to reduce the role of economic growth targets in evaluating cadres’ performance, but strong incentives remain.
Of course, while staggering, we suspect that global investors will promptly dismiss the potential impact of 30% swings in GDP figures from some of China’s largest industrial regions and continue to execute their BTFD trading strategy.